Latin America Economic Forecast

Economic Snapshot for Latin America

March 18, 2015

Economic activity grows at tepid rhythm in Q4, expected to slow further in Q1 2015

Latin America remains trapped in a period of sluggish economic growth. The majority of the economies in the region slowed in the last quarter of 2014 and tepid economic activity has carried over into the first quarter of 2015. Latin America’s economy expanded 0.5% annually in the fourth quarter of 2014, according to the regional GDP estimate, which came in slightly below the 0.6% increase registered in the previous quarter. A notable divergence in growth persists among most of the region’s economies, particularly in the case of powerhouses Brazil and Mexico where economic growth is still uneven. In Mexico, GDP growth picked up the pace in the fourth quarter, whereas Brazil’s economy contracted for the third consecutive quarter in Q4. Meanwhile, a deep economic deterioration is evident in countries with unsustainable economic policies—notably in Argentina and Venezuela.

In Latin America, lower commodity prices and weaker currencies at the outset of the year have reduced governments’ room to maneuver and implement further stimulus, which will hold back economic recovery. Lower oil prices, which are weighing on public accounts in Colombia, Ecuador and Mexico, prompted these countries’ governments to tighten their belts this year. Moreover, the fall in most of the exchange rates in the region that was observed at the beginning of the year has become more pronounced in recent days. Many major Latin American currencies hit multi-year lows in the first days of March, reflecting low commodity prices, deteriorating economic prospects and growing speculation that the interest rate increase in the U.S. will take place sooner than expected. In Brazil, greater economic and political uncertainties drove down the currency to the lowest level in over a decade. 

Growth prospects deteriorate rapidly, economy expected to slow in 2015

The economic outlook for Latin America deteriorated markedly again in March. This is the ninth consecutive month in which panelists surveyed by LatinFocus downgraded the region’s growth prospects. Forecasters cut regional GDP from the 1.2% increase expected last month to 0.8%. Growth at this rate would represent a mild deceleration from the 0.9% increase estimated for 2014. March’s downward revision reflects lower growth forecasts for 7 of the 11 economies surveyed, including regional key players Brazil and Mexico. Panelists left their growth estimates unchanged for Bolivia, Paraguay and Uruguay. Chile is the only economy for which panelists raised their projection. For 2016, panelists see Latin America’s GDP increasing 2.5%.

The weak economic outlook for Brazil is worrying, although worsening economic prospects in Argentina and Venezuela are no less concerning. Institutional quality in Argentina and Venezuela is poor, infrastructure is underdeveloped, state intervention in the economy is significant and markets are inefficient. In Brazil, the deterioration in economic activity that persisted at the outset of the year is affecting business and consumer confidence, which are already at historically-low levels. In addition, the scandal involving kickbacks and party-financing corruption at state-controlled oil company Petrobras—locally known as Lava Jato—comes at a difficult time for the economy and for President Dilma Rousseff. Rousseff’s popularity is at a record low and she will struggle to pass fiscal tightening measures this year as a consequence of the investigations in the Lava Jato corruption probe. 

Moreover, the headwinds that the region faced in 2014 are expected to persist in 2015. Commodity prices are expected to be lower on average in 2015 than in 2014, due to sluggish global demand and a strengthening U.S. dollar. The collapse of oil prices is expected to take a toll on Latin America’s largest oil producers Colombia, Ecuador, Mexico and Venezuela, although some will suffer more than others. Meanwhile, spreads on Venezuelan foreign-currency debt are high, increasing fears of a potential default. 

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BRAZIL | Political scandal further dampens economic prospects

Brazil’s economy is in the doldrums. GDP expanded meagerly in the third quarter of last year and more recent data suggest that prospects have worsened. The manufacturing PMI entered contractionary territory in February and the Brazilian real fell to a nearly-eleven-year low in March. On 15 March, almost a million people gathered across the country to protest against President Dilma Rousseff. President Rousseff’s approval ratings have fallen to an all-time low amid elevated inflation, a deteriorating economy and a large corruption scandal at the state-owned energy giant Petrobras. Evidence is mounting that a number of politicians, including key members of Rousseff’s coalition government, were involved in a multibillion-dollar kickback scheme. The scandal has increased opposition against Rousseff in Congress and is threatening to derail the government’s attempts at economic reform.

Brazil’s outlook for this year is worsening. Uncertainty over the government’s ability to boost growth is rising and the Petrobras scandal is expected to weigh heavily on investment levels. LatinFocus panelists shaved off 0.5 percentage points from last month’s projection and now expect the economy to contract 0.6% in 2015. For 2016, panelists see the economy growing 1.5%. 

MEXICO | Following solid performance in Q4, data shows economy shifting into lower gear in Q1

The economy gained traction in the last quarter of 2014 due to solid growth in construction, manufacturing and services, which compensated for the dismal performance in mining. With a 2.1% expansion in the full year 2014, the economy expanded at a faster pace than in 2013. However, the first indicators for 2015 suggest that the economy is again shifting into lower gear. Business activity in the manufacturing sector moderated in February, suggesting that the sector is off to weak start. Consumer confidence also fell for a second month in a row in February, signaling weaker household spending in the coming months. On 4 March, the government stated that it may need to tighten its belt further in 2016 if oil prices do not rebound.

Mexico’s growth prospects deteriorated this month, as lower oil prices prompted the government to announce a series of budget cuts, which are equivalent to 0.7% of GDP. Our panelists expect the cuts to have a marginal impact on growth and lowered their 2015 GDP growth forecasts by 0.2 percentage points. Now, they expect the economy to expand 3.0% this year. In 2016, the panel projects the economy to expand 3.5%. 

ARGENTINA | Economic recession in 2014 expected to continue in 2015

Argentina’s economy is expected to have recorded its second consecutive contraction in the final quarter of last year. Although recent data point to a slight improvement in consumer sentiment and industrial production, prospects for this year remain lackluster. The country is expected to have recorded its highest fiscal deficit since the 2001 crisis last year. The government is continuing to rely on the Central Bank’s issuance of local currency to cover its spending and it is likely to maintain this fiscal expansionary strategy ahead of the October presidential elections. Political turmoil and uncertainty related to the yet unresolved holdouts saga will exert pressure on international reserves this year, although the Bank is expected to continue intervening in the foreign exchange market to maintain a moderate and gradual depreciation of the peso. Inflationary pressures derived from high issuance of local currency combined with a relatively slower depreciation of the peso will continue to weigh on the country’s competitiveness and lead to a further deterioration in Argentina’s external accounts.

Macroeconomic imbalances, unfavorable external conditions and the unresolved holdouts issue suggest that the recession is likely to continue this year. LatinFocus Consensus Forecast panelists expect the economy to contract 0.3% this year, which is down 0.1 percentage points from last month’s projection. The panel foresees the economy recovering in 2016 and posting a 2.3% expansion. 

VENEZUELA | Recession deepens and outlook worsens, Simadi’s effectiveness remains to be seen

The Venezuelan economy entered recession in 2014, having recorded three consecutive contractions from Q1 to Q3. Meanwhile, the government’s finances are under pressure due to the sharp drop in the price for oil, which represents the vast majority of Venezuela’s dollar income. In an effort to ease dollar shortages and extensive black market activity, the government launched an overhaul of the exchange rate system on 12 February known as “Simadi”. However, little has changed since the new regime and the bolivar traded in the parallel market has tumbled since its introduction.

Venezuela’s outlook for 2015 is grim. The country is facing recession, skyrocketing inflation and a severe credit crunch. Against this backdrop, LatinFocus Consensus Forecast panelists shaved off 0.5 percentage points from last month’s projection and now see a 4.9% contraction in GDP for 2015. For 2016, the panel sees GDP falling 0.1%. 

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INFLATION | Intense pressure on major currencies pushes up inflation forecast 

According to preliminary data, inflation in Latin America rose to 12.8% in January, which came in slightly above the 12.7% observed in December. A double-digit inflation rate in Argentina and soaring consumer prices in Venezuela are behind the upward pressure on the regional average. For this year, inflationary pressures are expected to come from an across-the-board fall in the value of most currencies in the region. LatinFocus Consensus Forecast panelists expect regional inflation to end 2015 at 16.3% (previous estimate: 13.6%). The upward revision was mainly due to a massive increase in Venezuela’s inflation forecast; the country is expected to end 2015 with an inflation rate of 100%. In addition, higher inflation expectations were recorded for Brazil, Chile and Colombia. In 2016, LatinFocus panelists expect the regional average to end the year at 11.8%.

- Ricardo Aceves, Senior Economist

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